British Steel, an icon of the industrial heritage of the very nation that initiated the Industrial Revolution is on the brink of collapse. Its decline since the 1970s has been precipitous and it is now facing the closure of its last plant in Scunthorpe.

Carbon taxes have been squarely blamed for driving up costs that the business can no longer bear and so it faces collapse. While this is superficially true, the real root cause is the failure of the market to properly price carbon from all sources, domestic and foreign. It’s a failure of the design of the European ETS. In short, this is not a case of too much carbon pricing – it’s a case of not enough.

A Carbon Fee with effective border adjustment taxes would simultaneously action four key goals:

• properly price steel, factoring in its carbon emissions,
• incentivise reductions in carbon emissions from the sector
• protect the British heavy industry from dirty, unfair competition, and
• preserve, and indeed nurture, a vital strategic industry

20th Century Policy for a 21st Century Problem

The immediate problem for British Steel is the bill for Carbon Credits that has come due under the European Emissions Trading Scheme (ETS). The company has sought a loan of £100M from the U.K. government to pay this bill but it has no obvious sources of revenue to repay the loan, making propping up British Steel a very risky prospect from the taxpayer’s point of view.

But ultimately, the pressure is coming from British Steel’s inability to raise enough revenue from sales due to the crushing competition that the company faces from cheap imports of steel into the EU from China.

Not only is the steel industry in China directly subsidised, it actually enjoys a huge and undercounted subsidy due to the inadequate carbon pricing that exists in China. The price is almost negligible at present (roughly $5.50/tCO2 vs $28.50/tCO2 in the EU) and more importantly, most of the economy, including the steel industry, is exempt altogether.

So while the ETS is trying to correct the market failures associated with the externalised costs of fossil fuels used in European production, there is no accounting for the massive emissions embedded in imported steel coming from China, leaving European manufacturers at a huge disadvantage.

Border taxes level the playing field for carbon

A border adjustment tax on carbon imposes tariffs on imports from countries that are not adequately pricing carbon themselves. This immediately strips out the cost advantage of imports from dirty economies associated with underpriced carbon in those economies. In fact, as the carbon price rises, these tariffs dominate the cost of such dirty imports and they become completely uncompetitive.

Furthermore, to keep the market fair in the opposite direction, for exports from the clean producer to the high-carbon economy, the relevant carbon fees are refunded to the producer on export, removing the advantage that the dirty producer has, even in their own territory.

What about the effect on consumer prices?

A common objection to tariffs is that they raise consumer prices, often punishing those who can least afford higher prices. This is an especially prevalent concern in a time of incipient trade wars and the economic distress they cause.

This is where the Dividend element of the Carbon Fee & Dividend policy comes in. All revenues from the carbon pricing, whether from domestic producers or tariffs on imports are fully distributed to citizens. This not only protects low and middle earners, it actually benefits them overall.

Price ALL carbon to rebuild British industry

The U.K. has made significant progress decarbonising its energy supply and just recently it boasted the longest period of coal-free energy production since 1882. But at present, the U.K., and relatively low-carbon economies like France, have no way to fully monetise their cleaner power sector when it comes to international trade.

This can be directly addressed by a Carbon Fee & Dividend policy, and when it is, it will give shelter to traditional industries that are being unfairly eroded by dirty imports and will provide a huge boost to investment in new, clean industrial production that can leverage the burgeoning low-carbon energy sector that the U.K. is building.